Competition, recruitment cost slash operating income at UPMC
Increased competition from other insurers and the cost of recruiting new doctors led to a drop in UPMC's income in the July-September quarter.
Western Pennsylvania's largest hospital system reported operating income of $72.3 million, a decline of more than 50 percent from the same period a year ago, when it had operating income of $153.3 million.
UPMC paid more for salaries and benefits for its employees and spent $25 million to recruit physicians, said Robert DeMichiei, chief financial officer.
The system employed 3,321 doctors as of Sept. 30, up from 2,954 on Sept. 30, 2011.
Doctors are key to a health system's financial strength, because they put patients in hospital beds. A top neurosurgeon, for example, can bring in millions of dollars in annual revenue to a hospital, experts say.
And competition for new physicians has heated up in the last year as Highmark Inc., the state's largest health insurance company, recruits doctors for its own health system.
For example, a bidding war broke out last year between Highmark and UPMC for what was previously the region's largest independent physician's practice, Premier Medical Associates in Monroeville. Highmark paid $70 million to acquire the practice in January, Keith Ghezzi, interim CEO of West Penn Allegheny Health System, testified in Allegheny County Common Pleas Court last week.
Also facing strong competition is UPMC's insurance division, UPMC Health Plan, DeMichiei said.
While it increased membership to 2 million people, as of Sept. 30, up from 1.7 million at the same point last year, the region's second largest health insurer behind Highmark had to reduce premiums to increase its business, DeMichiei said.
That rate squeeze reduced income by $15 million during the quarter, he said.
“We're seeing significant competition,” he said.
UPMC Health Plan not only is trying to take business away from Highmark, which controls more than 60 percent of the health insurance market in Western Pennsylvania, but there are now four national insurers also competing for business in Pittsburgh.
Last year, UPMC signed new reimbursement agreements with Aetna Inc., Cigna Corp., HealthAmerica and UnitedHealthcare, giving the companies full access to UPMC's 19 hospitals and its more than 3,300 physicians. At the time, UPMC was trying to end its relationship with Highmark and wanted to give Highmark's customers options for keeping in-network access to UPMC.
UPMC and Highmark in May agreed to a contract extension that will keep UPMC in-network for Highmark members until the end of 2014.
During the quarter, UPMC's revenue was $2.45 billion, up slightly from $2.41 billion a year before.
While patient volume increased overall, DeMichiei said growth came from less-profitable observation cases at its hospitals.
In an attempt to rein in rapidly rising health costs, many insurers in recent years have classified hospital stays as observations, rather than admissions. DeMichiei said observations are reimbursed at a lower rate than admissions, even though both require the same amount of hospital resources.
UPMC's observation cases increased by 23.4 percent, while admissions declined by 1.8 percent during the quarter, compared to the previous year.
While admissions are declining, DeMichiei said UPMC is outperforming the trend in Western Pennsylvania, which had admissions drop 2.5 percent during the same time period.
“We're not shrinking as much as the market is,” DeMichiei said.
Net income during the quarter was $180.2 million, compared with a net loss of $120.1 million the year before. Net income includes investment gains and other nonoperating income that doesn't come from providing medical services.
UPMC brought in $104.8 million from investing and financing activities, compared with a loss of $273.4 million the year before. The gain increased the value of the system's “reserve portfolio” to $3.9 billion, as of Sept. 30, “its highest level ever,” Treasurer Tal Heppenstall said.
Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or email@example.com.
Add Alex Nixon to your Google+ circles.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Officials identify man, woman killed in apparent Oakland murder-suicide
- LaBar: WWE not backing down from controversy
- Stat dropoff, road struggles have Penguins seeking consistency
- Rossi: In Super city, everything but football matters
- Overnight snow delaying schools in western Pennsylvania
- LCB, Duquesne University police recover rare bourbon in illegal sale
- Beloved North Side gardener gets new truck, paid for by her neighbors
- Pa. Treasurer McCord resigns without explanation, to leave Feb. 12
- Kennametal plans plant closings, job cuts in fallout from oil and gas decline
- Hotel Monaco creative director: Whimsical decor requires open mind
- Driver leaps from sliding truck just before it topples down hillside in Fawn